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Growing In-Home Consumption Peps Up Soft Drinks Industry Outlook

Rajani Lohia

The Zacks Beverages - Soft drinks industry comprises companies that manufacture, source, develop, market and sell non-alcoholic beverages. Soft drinks mainly include sparkling soft drinks, natural juices, enhanced water, sports and energy drinks as well as dairy and ready-to-drink tea and coffee beverages. Notably, some of the industry players like PepsiCo produce and sell handy food with flavored snacks, which complement their beverage portfolio.

These companies sell products through a network of wholesalers and retailers that include supermarkets, department stores, mass merchandisers, club stores, and other retail outlets. Additionally, some of them offer products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

Let’s take a look at the industry’s major themes:

  • The coronavirus pandemic has led to an increase in at-home consumption for soft drink lovers, which has led to a splurge in at-home channel sales. Moreover, the work-from-home trend and inability to visit coffee shops have increased in-home coffee consumption, which is likely to beef up market share for this category. Higher in-home beverage and coffee demand is likely to compensate for the sluggishness in the away-from-home channel due to the pandemic. Further, beverage companies are increasingly investing in digital platforms, as consumers’ have shift to more online purchases amid the pandemic. This should bolster the industry players’ online presence, which is likely to be a win-win not only in the near term but also in the long run. Additionally, the aggressive cost management initiatives adopted by the industry players is expected to support margin and bottom-line growth in the near term. Apart from these, the companies are renewing focus on streamlining their portfolio of brands to exit unproductive brands and divert resources toward brands with more growth potential.
     

  • Continuous innovation of products, in terms of ingredients, formulation, and packaging, acts as one of the prime catalysts for the soft drinks market. Health-conscious consumers are switching to healthier alternatives like energy drinks, sports drinks, low-or-no-sugar carbonated drink variants, sparkling water, dairy, iced tea, juices and ready-to-drink coffee. Particularly, in the United States, cold brew coffee is perceived as healthier than energy drinks and sugary sodas. Therefore, the biggies in the industry — PepsiCo and Coca-Cola — are putting their best foot forward to grab a bigger share of the cola-coffee market. Notably, ready-to-drink coffee and energy drinks are among the best-performing categories amid the pandemic.
     

  • Amid the coronavirus-led closures, beverage companies are likely to continue witnessing declines in the convenience and gas, and away-from-home channels like restaurants, sporting events, and movie theaters. The softness in these channels is hurting volumes due to a negative channel mix. Notably, the away-from-home channel accounts for the majority of revenues for the players in the soft drinks industry. Further, supply chain disruptions and delayed shipments have been detrimental to the top line, which is expected to continue exerting pressure in the near term.

 

Zacks Industry Rank Indicates Strong Prospects

The Zacks Beverages - Soft Drinks industry is housed within the broader Consumer Staples sector. It carries a Zacks Industry Rank #82, which places it in the top 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Beverages – Soft Drinks industry has underperformed the S&P 500 Index but outpaced the Consumer Staples sector in a year’s time.

While the stocks in the industry have collectively declined 5.5%, the S&P 500 has gained 8.1%. Meanwhile, the sector has registered a decline of 8.5% in the said time frame.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing soft drinks stocks, the industry is currently trading at 23.58X compared with the S&P 500’s 22.63X and the sector’s 20.15X.

Over the last five years, the industry has traded as high as 23.58X and as low as 18.35X, with a median of 21.49X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

 

Bottom Line

Amid the coronavirus pandemic, the soft drinks industry is witnessing declines in the away-from-home channels due to cancellation of sporting events, closure of restaurants and movies. This remains a key headwind to top-line growth until post-pandemic recovery. However, growing in-home consumption of beverages and coffee has led to a spike in at-home channel sales, which should support sales trends in the near term. Moreover, increased investments in expansion of digital presence are likely to benefit the players due to consumers’ growing preference for online shopping. Also, aggressive cost-containment measures adopted in the wake of the pandemic are likely to prove beneficial for the industry participants.

We have two stocks in the Beverages – Soft Drinks industry currently sporting a Zacks Rank #1 (Strong Buy) and one stock with a Zacks Rank #2 (Buy). We have also highlighted two stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look.

National Beverage Corp. (FIZZ): This producer and distributor of waters, juices, energy drinks, and carbonated soft drinks primarily in the United States and Canada has witnessed growth of 58.4% in a year. The Zacks Consensus Estimate for this Zacks Rank #1 company’s current-year EPS has been revised 35.6% upward in the past 30 days.

Price and Consensus: FIZZ


 

CocaCola European Partners PLC (CCEP): Shares of this producer, distributor and seller of a range of non-alcoholic ready-to-drink beverages have declined 27.2% in the past year. However, the Zacks Consensus Estimate for this Zacks Rank #1 company’s current-year EPS has moved north by 2.8% in the past 30 days.

Price and Consensus: CCEP


 

Monster Beverage Corporation (MNST): This Corona, CA-based company is a leading distributor of energy drinks and alternative beverages. It carries a Zacks Rank #2 and the stock has surged 16.3% in the past year. The Zacks Consensus Estimate for the company’s current-year earnings has moved up nearly 0.5% in the past seven days.

Price and Consensus: MNST


 

The Coca-Cola Company (KO): Shares of this soft-drinks behemoth have declined 10.3% in the past year. The Atlanta, GA-based global beverage giant’s portfolio includes more than 4,700 beverage products (and more than 500 brands), spanning sodas (or sparkling beverages) to energy drinks. Moreover, this Zacks Rank #3 company’s current-year consensus earnings estimate has moved up 0.6% in the past seven days.

Price and Consensus: KO


 

PepsiCo Inc. (PEP): The stock of this Purchase, NY-based company has gained 5.2% in the past year. It is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. This Zacks Rank #3 company’s current-year consensus earnings estimate has moved up 0.4% in the past 30 days.

Price and Consensus: PEP

 

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PepsiCo, Inc. (PEP) : Free Stock Analysis Report
 
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